If you are struggling with credit card debt, you are not alone. Canada’s credit card debt is on the rise, and the household debt ratio has seen a 70% increase in 20 years. The average Canadian now owes about $1.70 for each dollar of income spent per year, after taxes. When you have balances on different cards, paying them off can be challenging. It is hard to make progress clearing your debt when you must split payments between, say five other accounts. Using some form of credit card debt consolidation can help you quickly tackle your debt situation.
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Consolidating credit card debt means combining different credit card balances into a single monthly payment that usually has a lower interest rate than what you are paying. Consolidating debt takes time, and most methods require an application process to see whether you get approved. Here are your best debt consolidation options in Canada.
Credit Counseling and A Debt Management Plan
Non-profit credit counselling organizations can review your whole financial situation and work with you to develop a plan to take on your financial challenges. They offer advice about budgeting, credit card issues, debt management and money management.
A credit counselling service may work with creditors to secure you better terms on your loan, including lower monthly payments, reduced interest rates, or waive certain fees. You make a single monthly payment to the organization, which then distributes the funds to the creditors. Debt consolidation with a debt management plan requires you to surrender all but one credit card, live on a tight budget and clear the debt in under five years.
You’ll need to qualify based on your income before enrolling in a debt management plan. You’ll be eligible if you have sufficient money to meet your monthly expenses. A disadvantage of using this method is that some credit counsellors may charge you for some of the services they offer, and you might agree not to get a new credit card if you take part in a debt management plan.
Debt Consolidation Loan
You can use a personal loan to consolidate debt, and the funds from your debt consolidation loan may be used to clear your credit card balances. Instead of making several payments every month, you make a single payment for the personal loan.
With a good credit rating, you may qualify for a lower rate on your personal loan. Personal loans also give flexible repayment terms, so you can choose one that matches your budget. Some lending institutions will also send the loan payment to your creditors, so you won’t use the loan funds.
On the flip side, you must meet the lender’s eligibility requirements to get a personal loan. A lower credit score will increase your interest rate. You may not even qualify if your score is poor.
Using Credit Card Balance Transfers
Consolidating debt with credit card balance transfers can help you save money on credit card interest and reduce your repayment period. Balance transfer allows you to move balances from one or more credit card accounts to an entirely different one. Balance transfer credit cards typically give a 0% introductory APR on the balances you transfer within a specific period. You may avoid paying interest charges on your transferred balances if you clear your balances before the introductory period expires.
Balance transfer credit cards usually have a limited promotional period, so any balances that are not cleared before the intro period lapses will accrue interest.
Remember, you may not be able to transfer balances between cards provided by the same lender. It is also crucial that you make payments on time since late payments could cancel the introductory APR promo offer.
Borrow from Family and Friends
Another way to consolidate your debt is borrowing money from a friend or family member, clearing your individual debts and then paying off your friend over time. The possibility of getting help from family or friends depends on how close your relationship is and your flexibility with the repayment terms.
Sit down with your friend, share all your budget debts, interest rates and monthly payments with them. Assure them that you can repay the loan and how you plan to achieve that. Remember, don’t seek assistance from a family member or friend who is struggling financially.
Borrowing from family and friends will typically have no origination fee. You also won’t pay any interest, and it’s probably the easiest way to get money. Unfortunately, you could destroy your relationship with them if you’re unable to repay the loan.
Consolidate with a Home Equity Loan
Home equity loans allow you to borrow against your current home value and use the cash to clear your credit card debt. This might be a good option since these loans usually have lower rates than personal loans and credit cards. However, defaulting on payments could cause the lender to start foreclosure proceedings, and you could eventually lose your home.
Borrow from a Life Insurance Policy
A rarely known option for consolidating credit card debt is borrowing money from your life insurance policy. You may borrow up to your policy’s cash value, use the funds to clear several debts and later make payments to your life insurance policy. While you might not need to repay the money you borrowed, your death benefit will reduce by the amount of money you borrowed.
File a Consumer Proposal
Filing a consumer proposal might be an excellent alternative if you do not qualify for a debt consolidation loan. It helps you consolidate several debts into one fixed monthly payment that is affordable. With this proposal, you simply negotiate a lower cumulative debt balance with all your creditors and promise to make consistent monthly payments on your balance for up to 5 years.
If you cannot consistently make payments on the program, the proposal collapses and can’t file another one. For this proposal to work, creditors who hold at least half of your debts must agree with the request. Filing a consumer proposal gives the benefit of creditor protection, an interest-free repayment plan and paying less than what you owe.
Consolidating debt doesn’t mean paying it off but rather moving it around in a way that makes repayment more manageable. Before you move to consolidate debt, weigh all the options at your disposal.
Understand the risks associated with each method and ensure you repay all the loans you take out to consolidate your credit card debt. Playing around with debt could cost more money, take longer, or jeopardize your future.
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